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October 31, 2015 – Weekend Market Comment

October 31, 2015 – Welcome to my weekend market comment, an analysis tool I use in my own portfolio decisions, published free to the web every weekend before the New York opening bell. For full details read my disclaimer (link at the bottom of this page).

The Blah Blah Blah (courtesy of CNBC)
Stocks close near session lows, but post best month in 4 years
U.S. stocks ended lower Friday but closed out their best month in four years, helped by a recovery in oil prices and hopes of easy monetary policy.  The Dow Jones industrial average closed down 92.26 points, or 0.52 percent, at 17,663.54, with Pfizer the greatest decliner and Caterpillar leading advancers. DuPont was the best gainer on the month, while Wal-Mart was the worst performer. The S&P 500 closed down 10.05 points, or 0.48 percent, at 2,079.36, with energy leading five sectors higher and financials the greatest laggard. All 10 sectors closed higher for the month, with materials the greatest gainer. The Nasdaq closed down 20.53 points, or 0.40 percent, at 5,053.75.

What I Think                  
Since 1980 the S&P 500 has been up over 8% in October four times, so this October has been one of the best ever, or has it? If you look at the S&P500 % of stocks over the 50 day average, it is peaking at over 85% of stocks now participating in the market. Yet if you look at a broader index like the Wiltshire 5000 or the mid-cap 400 you see a sluggish market. Once again the focus has been on a the big winners, like Netflix and Amazon. In fact the best performing average through this period has been the 100 top stocks of the SnP500. 

Normally that is a sign that investors want to be in safer stocks but not this time. Two safer big stock indexes are the consumer staples and the Dow 30, both doing relatively poorly. The Dow is full of stocks hit hard by the global slow down and the energy glut. Exxon, Chevron, Walmart, IBM, Caterpillar and even Goldman Sachs just suck. 

It smells of hedge funds loading up trying to reclaim some glory before the year ends. They pour billions in to the same wonder stocks with crazy valuations especially firms buying their own stock back. Value and earnings are again irrelevant as they were in 1999 as the tech bubble roared higher.

The S&P500 is a cap weighted index so the top 10 holding represent almost 20% of the index. Apple alone is almost 4% of the S&P500. When the 10 biggest holdings go up, the whole index looks strong. In the long run Cap weight is outperformed by it's equal weighted cousin an ETF with the ticker RSP. To some degree, strong markets favor a board rally and so RSP should do better than SPY in a thriving market. It is far from a certainty, but there is a correlation between times when the cap weighted S&P500 (SPY) has out performed the equal weight version(RSP) -- signaling an up-coming sell off. 

Notice first the bottom panel of the chart, that is the overall market the Wiltshire 5000. The pink shaded zones are market weakness or in the case of 2008, an all out recession, in other words time to be cautious. In the upper pannel that green squigle is RSP / SPY in other words a ratio of (equal weight) RSP and (cap weight) SPY.  Now notice the red line on the the upper panel, the 120 ema of the ratio. When the average (red line top panel) turns down --- a new pink zone begins. In fact the current market looks a lot like summer 2007. Don't panic, but what it really is saying, is the news is not all good.

Pay attention to our sectors graph this week. Friday saw an abrupt rotation to more defensive stocks and on our VIX chart there is a tiny blip upward beginning Friday that may gather steam. Also too early to call, but the OBV chart indicates a few days of the big names fading the market.

It All Shows Up In The Charts . . .

Section 1: The Big Picture

These charts tell us if we should even be in the market at all.

Bull Bear Lines                   
Learn to use this chart it is in Lesson 1 of the CME4PIF School there is a link on the bottom of each weekly market comment. 

Well it is technically still a bear market, but this recovery has been just too strong to sit on the sidelines. Last weak I declared the bear dead and it was a very profitable week to be long.

NYSE New 52 Week Highs - New 52 Week Lows                
Learn to use this chart it is in Lesson 5 of the CME4PIF School there is a link on the bottom of each weekly market comment.

Nothing but strength here.

Industrial Production                   
America is nothing without manufacturing might. 

Still has me concerned,  this chart looks like a long-term danger to this market.

Non-farm Payroll Employment Index                   
As a consumer economy America is dependent on strong employment.
Again Nothing but strength as more and more firms begin to have trouble finding skilled tradesmen and programmers.

Market Renko                   
Renko charts are not based on time (note the funny date scale) and only draw a new brick if the market moves in to a new territory. They really can simplify the whole question of direction. 

Still looks good, but I did mention there is strong historical resistance at three bricks.

Section 2: Short Term Timing

Consider this as fine tuning. As you learned in section one of the CME4PIF School most investors don't need to plan the short term, But you can use this section to decide on ratios of risk. For example you can time a strategy of moving from a defensive ETF like DEF and an aggressive ETF like QQQ. or between a ratio of equities and bonds. You could move from broad safe indexes like DIA (the dow 30) and  aggressive equities like Google and Amazon. Remember don't use these  charts to anticipate, and don't do counter trend strategies like shorting a bull market.

Primary Sell                   
Learn to use this chart it is in Lesson 2 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment.

Experts are not afraid at all VERY BULLISH!

On Balance Volume                   
Now this is VERY interesting. The big boys are STILL in this market. Yeah its heading down but no running for the exits yet. NOT Positive.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 15.

Check out that break upward just a tiny bit in the CCI (red arrow). 

VIX Evaluator                   
Don't forget this is an experimental VIX indicator. Looks like it wants to head up again. 

Still positive the worst you could say... getting flatter.

S & P 500 Over 50 day                   
Learn to use this chart, it is in Lesson 4 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment.

Wow we topped Nov 2014, that is a strong rally . . . But my hunch is it will be only a few weeks until it dissolves. In 2014 it took a month to fade, but this is more violent up and should expire all the faster.

Green Arrow                   
Learn to use this chart, it is in Lesson 3 of the CME4PIF School. There is a link to the school on the bottom of each weekly market comment. Wait for a green arrow before putting new money to work. 

Still weak. Mid-caps just are not selling well.

Section 3: Allocations and Sectors

OK Now you know  the market direction, where should you put your money?

Nasdaq Summation                   
This chart tells us if technology is a good bet now, general the NASDAQ leads the other indexes. The summation index can often spot weakness-strength before the price reflects it.

After a big gap up, the Nasdaq looks tired, summation index is rounding?

Aggressive Defensive Chart                   
Here we compare fast moving mid cap firms (ticker MVV) against the old reliable big dividend payers (ticker DVY).

Aggressive trumps value, Very bullish!

Bond vs Equities                   
Consumer stocks are turning up for the holiday season.  Bonds are outperforming equities, a sign of growing fear.

Bond Direction                   
The direction of the bond market at this time is critical. The Bond Bull began in 1981, we have has a 33 year bull market in U.S. Bonds. When it unwinds it will have major implications.  This fall, as the US federal reserves tries to take off the economic training wheels, interest rates are near zero and so have no place to go but up, then again many feel the economy cant take the shock. The 50 day average line (red) is clearly in a downtrend. The US treasury market is is twice the size of the stock markets. As investors flee bonds who will buy them from fleeing investors?

Bonds have pulled back to the rising 50 day moving average. But now are going higher.


The consumer lifts off as we anticipate a good holiday shopping season. Notice the rising defensive index (brown) and utilities (red). That show defensiveness. 
    XLF - Financial Stocks - Dark Blue dots
    QQQ - Nasdaq - Purple
    XLY - Consumer discretionary - Green
    XLU - Utilities - Red
    DEF - Defensive stocks - Brown

But if the consumer is so strong, why is Macy's and Walmart in a slump? The answer is Amazon. It is a shopping online Christmas for 2015.

Could it be Walmart is no longer considered a fashion leader? . . .

It is a global Market are there better place to put your money? Remember this chart is compared to the S&P 500 U.S. market. If the U.S. market is falling these all might be along for the ride, even if this chart shows them rising. When America has a cold the world gets the flu.

Ahh the global suck fest.
    XIU.TO - Canada - Blue dots
    DAX - Germany- Purple
    FXI - China - Green
    EEM - Emerging- Red
    EPHE - Philippians - Brown

Major Market Sectors                   
This shows the over all U.S. Market, from the equal weighted S & P 500. Below it are broad sectors you might want to look at.

Small-caps and mid-caps notably under-performed large-caps in October, while Materials, Energy, Technology and Telecom were the best performing sectors. I mentioned telecom last week, saying this is going to be a new smart phone Christmas, but I expect Verizon and AT&T to get the most out of it, with lucrative data plans. One of the odd things is that most of the data sold on these plans is never even used, as most plans have more data than most users need. Money for nothing!

Outside of the U.S., the last week of the month was pretty brutal.  Country ETFs were all in the red last week, with China (FXI), India (INP) and Australia (EWA) leading the way lower. Although there was a small bonce up the last two trading days this month. 

Oil (USO), gold (GLD) and Silver (SLV) were all up in October, but natural gas (UNG) plummeted 15.5%, leaving it down 33.5% on the year.

It is all about the USA new economy leaders right now.

    Canada Dividend Stocks vs S&P 500 in Canadian $ - Red
    Emerging Markets vs  EW S&P 500 - Pink
    US Bonds vs EW S&P500 - Blue
    Commodities vs EW S&P500 - Brown
    Gold vs EW S&P500 - Gold

Section 4: Special Interest

What Works Now                  
Insurance firms are doing well do to anticipation of interest rate rises.

The technology sector ETF (ticker XLK)

The Snobs Cut back
In another sign of a China slowdown, sales of personal luxury goods, which include leather goods, jewelry, watches and fashion, are expected to grow only 1 percent at constant exchange, to 253 billion euros. That compares with growth of 3 percent last year and 7 percent in 2013.

Luxury sales in Asia registered the worst historical performance at constant exchange rates, driven by lackluster trends in mainland China and sharp sales declines in Hong Kong and Macau.

Leading the pack down  Micheal Kors. Not only does Mr. Kors not look like a fashion designer, now no one wants his Korean made watches and microfiber shorts. The firm also is having a very high level of dissatisfaction  problems in in it new stores. Sales declines at Michael Kors, one of Macy's key vendors, were cited as a primary reason for the recent Macy's downgrade.

Just look at the Hero to Zero story for KORS, loosing 60% of its value in a year. The only people who like this stock say... hey this must be the bottom. HA!

Short Canadian Housing
The energy bust and Chinese investors looking further-afield than Vancouver, is causing trouble in Canadian house prices in this bit from CNBC.

Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 are now betting real estate values in Vancouver, Edmonton, Calgary and other Canadian cities will crash, financial insiders say.

The hedge fund investors, known as short sellers, are betting against what they believe is a housing bubble in Vancouver, Toronto, Calgary and other Canadian cities. They believe Canadians hold too much mortgage debt, and that Canadian banks, mortgage insurers and “subprime” private lenders will lose money on unpaid loans when property prices fall.

The trouble is worst in energy rich Alberta. Canadian Western Bank, the last of the nation’s big banks to report quarterly results, was the only lender to miss analyst expectations.

Be Wise Diversify
Right now Canada’s second largest railway is a good example of why it is important not to invest all your money in to one company. Sometimes a stock goes down for no immediately apparent reason. On this chart the green line is Canada’s largest railway CN, in a recovery from recent weakness in the Canadian economy. Normally Canadian Pacific (red line)  CN’s main competitor would be tracking the stock, but as you can see the red line for CP is not well and moving down while the green line for CN goes up.

The culprit is that dotted blue line, an American company called Valeant Pharmaceutical.  Valeant shares have plummeted since the company disclosed this month that it controlled Philidor, a drug distributor engaged in potentially illegal practices.  Philidor is a huge part of Valeant’s revenue. The Valeant announced on Friday that it had severed ties with Philidor.

Now here is the connection, the largest investor in Valeant Pharmaceutical  is Pershing Square Capital controlled by hedge fund billionaire William A. Ackman. Valeant it is causing Mr. Ackman’s a lot of pain. The Valeant investment has already lost $1.5 billion in value. Pershing Square Capital has dropped over 16% in value this year.  So how does that effect CP? Well it turns out Pershing Square also has a big stake in CP and other hedge funds are betting Pershing Square will need to sell its stake in CP just to keep the lights on. That is nearly 14 million CP shares that might be sold at fire sale prices.  So despite good profits and at least as good a financial position as CN, many investors are unloading CP stock in anticipation of big trouble. 

World View
Here is an interesting graphic from showing the allocation of U.S. economic aid, the nations are redrawn by the size of the aid they get. Of course if you know how this game is played this "Aid" is not money, it is loans to buy American consulting and weapons. Details are in the book Diary of an Economic Hit Man: Read more about that here.

Funny Business                  

Market Forecast                   
A mechanical trading system that stress preservation of capital.

Market Forecast Timid Bull

Buy the equal weight S&P 500 ETF RSP, defensive ETF DVY or the value ETF IWD.

The world is slowing, but America feels strong because of the jobs numbers. However housing starts are bad, Signed contracts to buy existing homes dropped 2.3 percent in September from August and were just 3 percent higher than one year ago, according to the National Association of Realtors.
As you saw above brick-and-mortar retailers are in tough shape. That is bad for high paid construction jobs.

Stocks had the best October since 2011. That bodes well for the rest of the fourth quarter and the next six months. The three months between November and January are traditionally the best three months of the year. As is the six-month period between November and April. As happened during 2011, stocks peaked in May and bottomed in October.  Now starts the second part of the "sell in May" maxim, which is to buy stocks back around Halloween. One of the concerns about the market rally is lack of participation by small and midsize stocks. That situation should improve as the January Effect starts to kick in. The "January Effect" refers to the tendency for small caps to do better than large caps heading toward January. According to the Stock Traders Almanac, small cap strength usually starts to pick up in late October. That should also serve to broaden out the stock market rally.

I am still long, but I am keeping my eye on the deteriorating OBV line and on primary sell indicator.

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